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  • Tilburg University

    Mandatory Adoption of IFRS and Analysts’ Forecasts Information Properties

    Beuselinck, C.A.C.; Joos, P.P.M.; Khurana, I.K.; van der Meulen, S.

    Publication date: 2010

    Link to publication

    Citation for published version (APA): Beuselinck, C. A. C., Joos, P. P. M., Khurana, I. K., & van der Meulen, S. (2010). Mandatory Adoption of IFRS and Analysts’ Forecasts Information Properties. (CentER Discussion Paper; Vol. 2010-112). Accounting.

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    Download date: 29. Aug. 2020


  • No. 2010–112


    By Christof Beuselinck, Philip Joos, Inder K. Khurana, Sofie Van der Meulen

    September 2010

    ISSN 0924-7815

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    Mandatory Adoption of IFRS and Analysts’ Forecasts

    Information Properties §

    Christof Beuselinck #

    Tilburg University and CentER

    Philip Joos

    Tilburg University and TiasNimbas Business School

    Inder K. Khurana

    University of Missouri-Columbia

    Sofie Van der Meulen

    Tilburg University and CentER

    Current draft: September 30, 2010

    # Corresponding author: Christof Beuselinck Department of Accountancy and CentER, Tilburg University,

    5000 LE Tilburg, The Netherlands. C.beuselinck@uvt.nl. T: +31 13 466 2682.

    § We appreciate helpful comments of Rashad Abdel-Khalik, Vasiliki Athanasakou, Paul Andre, Anne

    Cazavan, Stefano Cascino, John Campbell, Hans Christensen, Andrei Filip, Stephan Hollander, Sofie

    Hoozee, Andrea Menini, Zoltan Novotky-Farkas, Antonio Parbonetti, Erik Peek, Peter Pope, Jeroen Suijs,

    Katrien Vanden Poel, as well as workshop and seminar participants at the AAA FARS Midyear 2010

    Conference (San Diego), the 2010 EAA Conference (Istanbul), the 2010 Corporate Finance Day (Antwerp),

    the 2010 HMMT Conference (Maastricht), Essec Business School, Ghent University, HEC Paris, London

    School of Economics, University of Paderborn, University of Padova, and Tilburg University. Professors

    Beuselinck, Joos, and Van der Meulen gratefully acknowledge financial support from the European

    Commission Research Training Network INTACCT.

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    Mandatory Adoption of IFRS and Analysts’ Forecasts

    Information Properties

    Abstract: This study examines the properties of the information contained in analysts’

    earnings forecasts for mandatory IFRS adopters in Europe for the period 2003-07. We

    find a significant increase in the precision of both public and private information after

    switching to IFRS, especially for forecasts pertaining to 2006 and later. However, we are

    unable to detect a change in the consensus among financial analysts after the mandatory

    adoption of IFRS. These results suggest that the higher percentage increase in the

    precision of common information is offset by a proportionate increase in the precision of

    private information such that consensus among analysts does not change. When

    exploring analyst-specific precision in more detail, we find that the analysts who are

    following firms in more than one European country experience the largest post-IFRS

    improvement in private information precision. These results hold after controlling for

    factors that are shown in prior research to be correlated with analysts’ information

    precision measures. Taken together, our results suggest that mandatory adoption of IFRS

    had a significant and positive effect on the information processing of financial analysts

    but this did not occur homogeneously across analysts.

    Key words: IFRS, mandatory IFRS adoption; analyst forecasts, information environment.

    JEL-codes: G15, M41, M48

  • 3

    Mandatory Adoption of IFRS and Analysts’ Forecasts

    Information Properties

    1. Introduction

    In the last decade, more than 110 countries around the world adopted International

    Financial Reporting Standards (IFRS) as their official accounting standards. A large

    fraction of all firms that report under IFRS are domiciled in Europe. In its Regulation

    No. 1606/2002, the European Commission identifies enhanced comparability and

    increased transparency as important objectives that should be reached via mandatory

    IFRS adoption for all listed firms starting from fiscal year 2005. One way to study how

    the orchestration of such a large-scale, contemporaneous financial reporting switch

    contributes to these objectives is by studying the effect on financial analysts’

    information.1 Mandatory adoption of IFRS can have a direct effect on not only the

    information that is common across all financial analysts but also on the information that

    is idiosyncratic (uniquely private) to individual analysts. In other words, the precision of

    both common and idiosyncratic information can change after the adoption of IFRS. In

    this study, we empirically evaluate whether and how the mandatory adoption of IFRS in

    Europe altered the public and private information properties contained in analysts’

    earnings forecasts.2

    1 Prior research has identified financial analysts as an important set of expert information intermediaries.

    See Schipper (1991), Brown (1993), and Ramnath et al. (2008) for literature reviews describing the role of

    financial analysts in capital markets. 2 In this paper, we use the term IFRS to refer to all standards issued by the International Accounting

    Standards Committee or the committee’s successor, the International Accounting Standards Board, even

    though the standards issued by the former are typically referred to as International Accounting Standards

    (IAS). Moreover, to vary the exposition in the paper, we refer to public information as common

    information and private information as idiosyncratic information.

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    Evidence on the effect of IFRS adoption on the information common to all

    analysts and the information idiosyncratically inferred by individual analysts is related to,

    but distinct from evidence on the properties of realized forecasts such as forecast

    accuracy. Prior literature has primarily focused on the changes in forecast properties

    after the mandatory adoption of IFRS and documented that forecast accuracy, analyst

    following, and analyst dispersion improve after the mandatory adoption of IFRS for a

    subset of firms from a subset of EU countries (Horton et al. 2009; Byard et al. 2010).

    However, forecast accuracy is a function of the precision of public and private

    information, both of which have been shown in prior research to be associated with cost

    of equity capital (Botosan et al. 2004). To the extent mandatory IFRS adoption triggered

    private information acquisition, outcomes of forecast precision cannot provide

    unambiguous inference about changes in the information environment. Tests on how

    mandatory IFRS adoption affected the precision of public and private information

    provide more direct evidence on the channels by which mandatory IFRS adoption affects

    analyst behavior and can help sort out the source of the effects of mandatory IFRS


    To measure quality of information, we use the information precision measures

    that were first developed by Barron et al. (1998; hereafter BKLS). These measures are

    based on the assumption that analysts’ earnings forecasts reflect both public information

    shared by all analysts and private information available only to individual analysts. We

    first measure separate empirical proxies for the precision of public and private

    information from the observed forecast dispersion, error in the mean forecast, and

    number of analysts, and then use these estimates to derive a consensus measure to capture

    the proportion of the precision of analyst’s common information to the precision of their

  • 5

    total information. We then use an interrupted time-series design to investigate the

    patterns in the information properties contained in analysts’ forecasts for the year 2005

    when IFRS was mandated in the European Union (EU) for listed enterprises and for the

    post-adoption years